You are Group Treasurer of Sun and Sand plc, a UK package tour operator offering holidays in many parts of the world but specializing in Morocco, Spain and the United States. Sun and Sand is one of the major operators in the market, which is very price competitive. All competitors operate on margins less than 5 per cent.
The group contracts to purchase air travel and hotel accommodation up to one year ahead, air travel being ultimately invoiced in US$ and hotel accommodation being invoiced in the relevant local currency. Revenue is exclusively in sterling. The basis of competition in the industry is price which must be set one year ahead, for inclusion in the brochures. The impact of one competitor being slightly out of line on price produces a disproportionate change in that competitor's market share.
(a) If the biggest competitor decides not to hedge any of its exposures, what risks does this create for Sun and Sand plc?
(b) How would you manage these risks? (Association of Corporate Treasurers Part II, September 1991, Paper in Currency Management).